Covid Or Financial Sector Clean Up: BoG Governor discuss which of the two has had the most systemic impact on the banking industry
Governor of the Bank of Ghana (BoG), Dr Ernest Addison, has made a comparison between the Covid-19 pandemic and the financial sector clean-up exercise or reforms embarked by government from 2017 to 2019, with regards to the impact of each shock on the banking industry.
In making the comparison in an interview published in the maiden edition of the “Gh Bankers’ Voice,” a magazine by the Ghana Association of Bankers (GAB), the Governor determined which of the two has had the most systemic impact on the country’s banking industry.
Dr Addsion in the interview, made the following assertions;
The financial sector plays a pivotal role in every economy, therefore, any disruption in its stability has wider implications for economic growth and development. Over the past four years, two major events have occurred, each with a different impact on Ghana’s banking sector.
First was the comprehensive banking sector reforms over the period 2017 to 2019, and second, was the Covid-19 pandemic shock of 2020. Indeed, without this order of occurrence, the latter would have had dire consequences for the economy.
Clearly, the comprehensive banking sector reforms have had the most systemic impact with positive outcomes. The reforms included revocation of licenses, recapitalisation of banks, revamp of the regulatory and supervisory frameworks in line with the Basel Core principles, as well as the implementation of several directives including Corporate Governance, Fit and Proper Guidelines, and the setting of ethical standards for examiners.
All of these worked in concert to improve the stability and soundness of banks and other institutions. Following these, the financial soundness indicators showed that banks were well-capitalised and solvent, with enhanced liquidity, improved profitability, effective corporate governance and risk management practices and most importantly rebound in depositor confidence.
The foregoing suggests that but for the reforms, the pandemic would have been amplified and weakened the banking industry further, and ultimately jeopardized the effectiveness of the financial sector from supporting economic recovery.
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Commenting on whether the pandemic had reversed the gains made through the financial sector reforms, the Governor had this to say;
Overall, the impact of the pandemic on the industry’s performance has been moderate. The banking sector performance continues to reflect sustained growth in customer deposits, investments, total assets and profits while key financial soundness indicators in relation to liquidity, profitability and solvency remain healthy.
The industry’s Capital Adequacy Ratio of 20.8 percent at end-June 2021 was well above the minimum regulatory threshold.
Despite these positivities, the pandemic affected sectors of the economy differently and with demand constraints, credit to the private sector slowed significantly. The slower growth in lending broadly reflects increased credit risks on the account of uncertainties in the businesses environment due to the impact of the Covid pandemic on the real sector of the economy coupled with very high yields offered on government securities due to increased government borrowing.
Based on the latest macro-prudential risks assessments, banks are however, expected to withstand mild to moderate risk shocks although the emerging third wave of the pandemic could further elevate credit risks shocks. And this would require close monitoring of banks’ capital and liquidity buffers.
